IFI governance


IMF boardroom crisis: Europeans stubbornly cling to chairs

30 September 2010

IMF governance reform was thrown into disarray in August by a fight between the US and Europe over reducing European board seats. Other promised reforms, including to voting shares and leadership selection, appear to be going backwards.

Maintaining the IMF board size at 24, rather than the 20 stipulated in the Fund’s articles of agreement, requires an 85 per cent majority vote every two years, meaning  the US, with nearly 17 per cent of the vote, can block this. The US finally made good on previous threats and vetoed the decision in August, meaning that unless it changes its position, the IMF board will shrink to 20 seats by the end of October. Paulo Nogueira Batista Jr, the Brazilian IMF executive director said it was a “fully-fledged, possibly unprecedented crisis.” Domenico Lombardi of UK think-tank the Oxford Economic Policy Institute called it “an aggressive move generated by a strong sense of frustration at what the US sees as a European inability to foster the process of IMF reform.”

The move could hurt developing countries since the four chairs with the smallest voting shares are held by Brazil, India, Argentina, and Rwanda. In reality, however, it puts significant pressure on the Europeans to finally consolidate the nine seats they currently hold. Independent experts who put together the ‘fourth pillar’ report on IMF reform (see Update 66) have previously recommended a reduction of European seats to three or four, and IMF managing director Dominique Strauss-Kahn said in June that he supports a single seat for eurozone countries. In September, the benefits of consolidation were spelled out by European Central Bank president Jean-Claude Trichet who said that Europe needed to speak with a united voice to ensure it retains its influence in the IMF.

a fully-fledged, possibly unprecedented crisis.

In the past, as Germany, France and the UK have had single-country permanent seats, they have been obstacles to European consolidation. Strauss-Kahn highlighted the old-fashioned power politics that are at play by admitting that as a French finance minister in the late 1990s, he had tried to merge the French and German seats “until the French minister of foreign affairs stepped in, explaining it was a very interesting idea, but that if we started that, we’d have to do the same thing at the Security Council of the UN and there was no way.” However, it is expected that the current quota negotiations may push China into the top five shareholders for the first time, meaning France would probably fall out and have to give up its permanent seat allotted to the big five by the Fund’s Articles of Agreement. Smaller European countries with board seats, including Belgium and the Netherlands, are also fighting to protect their positions, keen to maintain control as the IMF grows in size and influence, including in eurozone countries such as Greece (see Update 72).

In mid September, the German finance minister aimed at the US weak spot by demanding that it abandon its veto in return for Europe giving up seats. Continued resistance to change by rich countries has led to increasing frustration on the part of developing countries. Trevor Manuel, head of South Africa’s National Planning Commission, and author of a 2009 expert committee report on governance (see Update 65) said in September that IMF and World Bank governance reform has “proceeded at a snail’s pace”. In August, African finance ministers increased the pressure on the Europeans by demanding a third seat for Africa, in recognition of the large number of countries represented by its current board representatives, and the heavy engagement of the continent with the IMF through lending, advice and technical assistance.

The current board term expires on 31 October, and time is tight if new board members are to be elected. The US seems set on holding out for a concrete concession from Europe, which may mean that the board will revert to 20 members until a new agreement can be reached. This threatens to temporarily disenfranchise the four chairs with the lowest voting share: Brazil, India, Argentina, and Rwanda.

Cronyism still rife

Meanwhile, in September the Bank appointed Egyptian investment minister Mahmoud Mohieldin as its new managing director without an open, transparent process for his selection. News agency Reuters reported a German official as saying that Europe is still planning to use its antiquated privilege of appointing the head of the IMF as a bargaining chip in negotiations. This together with reports that the US still wants to nominate the head of the Bank, has left observers wondering if public commitments made in 2009 and repeated regularly since, to select all senior management positions in the IFIs through an open, merit-based and transparent process will ever be honoured (see Update 71).

Other reform stalled

The public spat over board seats has overshadowed continuing negotiations over quota share and associated voting rights. These continue to back away from existing commitments to a shift of “at least” 5 per cent to developing countries and a reform of the quota formula (see Update 71). Current proposals in a July IMF paper, and an August Australian government paper for a G20 working group would result in shifts to emerging market and developing countries of less than 3 per cent. Even a 5 per cent shift, if it all went from developed to developing countries, would leave the IMF dominated by wealthy countries, which currently hold almost two-thirds of the vote. It is also not clear if the commitment to “protect the shares of low-income countries” will be upheld. Current proposals favour classifying low-income countries as those eligible for funding from the IMF’s Poverty Reduction and Growth Trust, which includes some lower-middle-income countries such as Armenia and Georgia.

In July, IMF managing director Dominique Strauss-Kahn said he hoped to boost the Fund’s lending resources by $250 billion from $750 billion to $1 trillion. This would represent a doubling of total quotas, the position previously backed by the G24 group of developing countries. This would allow more space for shifting voting shares to developing countries, give countries  greater access to IMF resources, and also make the Fund less reliant on ad hoc lending from rich countries through the New Arrangements to Borrow (NAB, see Update 65). In July, the IMF released a paper examining non-quota aspects of governance reform, which seemed to indicate little impetus for change, in part because of unhappiness with wrapping these reforms into quota discussions.

Civil society groups expressed concern about the slow pace of reform and called for more radical options to remain on the table. Pamela Gomez, of NGO Oxfam International, said “governance reform at the IMF is long overdue.”  In the UK, nine NGOs, including Christian Aid and ActionAid wrote to the UK finance minister calling for more substantive reform on voting and board seats, and supporting the introduction of a double majority voting system (see Update 55).

Similar letters were sent by NGOs in other European countries and a leading group of academics and experts wrote an open letter to IMF governors urging that reform be extended to encompass a “comprehensive package” including improved transparency and an end to the US veto. One leading expert, David Woodward in an article in Development went further, arguing that “‘economically-weighted voting in the IMF and World Bank should be abolished, and replaced with a system based on democratic principles – somewhere between one-country-one-vote and one-person-one vote.”